Congress Is Set to Limit Down-Payment Assistance

By Dina ElBoghdady
Tuesday, July 22, 2008
Washington Post Staff Writer

Mortgage programs that helped nearly 79,000 people buy homes using government-insured loans last year would be eliminated as part of a broader housing package that Congress expects to pass this week, key lawmakers said.

Under these programs, nonprofit groups provide buyers with money for down payments. Home sellers then reimburse the organizations and pay an administrative fee. More than half a million people -- including many first-time home buyers, minorities and single mothers -- have bought homes this way in the past decade using loans insured by the Federal Housing Administration.

But the FHA said seller-funded down payments present the single biggest challenge to its solvency. Borrowers who take part in these arrangements go to foreclosure at nearly three times the rate of borrowers who put their own money down, according to the agency.

The fate of these seller-funded down-payment-assistance programs has been in limbo for weeks. The Senate version of the housing bill would have banned them. The House version would not. Negotiators crafting a compromise bill have agreed to the Senate's position, which also is supported by the Bush administration.

"We're going to yield to the Senate on that," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee and a supporter of the programs. "There are a lot of trade-offs in the bill."

The administration has tried for years to end the programs but failed to overcome legal challenges. "No insurance company can sustain that amount of additional costs year after year and still survive," Brian D. Montgomery, the FHA commissioner, said in a recent speech.

But supporters of this kind of assistance said it meshes with the FHA's mission to serve low- to moderate- income people. While the system may have its problems, they say, it should be fixed, not abandoned, so that people like Tanika Warrior are not shut out of the market.

Warrior and her husband, Jimmy Hicks, suffered housing sticker shock when they moved to the Washington area from Arkansas a few years ago.

The couple, recent college graduates, had depleted their savings on tuition and care for their newborn son. But they had steady jobs and did not want to keep sinking money into rent, Warrior said. They also did not want to put off buying a home because they were not convinced that their finances would be stronger in a few years.

"We don't want to throw money in a hole," said Warrior, 24, a federal patent examiner. "My thing is we pay our rent every month and we've never been late, not once in five years. If we can pay our rent every month, we can pay our mortgage every month."

The couple worked with Nehemiah, the nation's largest down-payment-assistance charity. Nehemiah provided the 3 percent down payment the FHA requires. The couple secured a 30-year, fixed-rate loan for a townhouse in Herndon through First Savings Mortgage. Their monthly mortgage payment is now about $400 more than what they paid in rent, with taxes and insurance included, Warrior said.

Scott Syphax, president and chief executive of Nehemiah, which is based in California, has been in Washington pushing to save the programs. After he got word yesterday of the agreement to ban seller-funded down payments, he said he was "angry and saddened" about the fallout for "families and communities who obviously did not get a seat the table as these harmful policies were conceived."

Syphax and the FHA disagree about the most basic statistics on these loans. Syphax maintains that the agency's assessment is skewed. He said it has undercounted the number of loans made while properly capturing the number of foreclosures it has had to pay for -- thus inflating the percentage of bad loans.

The FHA strongly denies that. It also maintains that programs backed by Nehemiah and other nonprofit groups aim to skirt its policies that prohibit a seller from directly financing a buyer's down payment. Seller assistance distorts "the fundamental economics of a mortgage agreement," Steven Preston, secretary of housing and urban development, said in a letter to Congress.

Sellers who reimburse the cost of a down payment and shell out related fees of $400 or more try to recoup that money by raising prices on the homes they're selling, government officials said.

Those higher prices result in larger mortgage loans, making it more difficult for buyers to keep up with their payments, they said. The inflated prices also make it tough for buyers to refinance or sell if they lose their jobs, get ill or face some other financial setback -- hence the high foreclosure rates.

"While the seller and lender are able to close a transaction, it is the home buyer and general taxpayer who ultimately bear the long-term risk," Preston said in his letter.

It's unclear how quickly the new policy would kick in if it's enacted.

Supporters of seller financing, including members of the Congressional Black Caucus and the Congressional Hispanic Caucus, said they will push to revive it, perhaps under another administration.

"The Bush administration does not have a lock on history," said Rep. Al Green (D-Tex.), a member of the black caucus. "They only have a lock on the moment."

The administration is not getting all it wants on the FHA front. While the compromise bill would get rid of seller assistance, Frank said, it also would wipe out a new FHA initiative under which the agency charges borrowers insurance premiums based on credit risk, instead of one flat rate.

Salmineo Sherman Sr., who recently used seller assistance to buy his first home, is not tuned in to the horse trading on Capitol Hill.

But yesterday, he said he felt lucky that he bought his seven-bedroom house in Clinton this month. Without seller assistance, he and his wife would not have been able to close the deal. They have six children, two of them grown.

"I do not see myself as any risk at all because I'm not stretching with this house," Sherman said. "We can afford the monthly payments. . . . We're staying put, right in this house."